For wealthy individuals, particularly those with assets that cannot be easily sold to pay estate taxes, life insurance is often an important component of estate planning. For example, assume that Mr. and Mrs. Jones own a business worth over $10 million, which they manage with their two children. If their goal is to leave the business to their children, who have expressed a desire to continue the business, there is a major problem: a projected estate tax of about $1.45 million. In order to pay off the estate taxes, the Jones’ children may have no choice but to sell all or part of the business.
In such situations, it is possible to buy special life insurance (sometimes called “survivorship life” or “second-to-die insurance”) which will pay only after both spouses die.
Assuming that the Jones family has adequate cash to buy such a policy, they must be extremely careful to avoid giving Mr. or Mrs. Jones any “incidents of ownership” over the policy. (If they buy a $5 million life insurance policy, and the policy proceeds were included in the estate, then the total estate would be $15 million and the tax would be nearly $4 million.)
The obvious solution is for the Jones’ children to buy the insurance on their parents’ lives, or for Mr. and Mrs. Jones (or their children) to set up a special life insurance trust.